With Wary Eye on Global Tumult, Fed Opted to Stay on Policy Path for Now
Minutes Show Officials Conflicted Over Domestic Economic Improvement and Troubles Abroad
Federal Reserve officials were preoccupied at an October policy meeting with tumult in financial markets, weak economic conditions abroad and risks that low inflation could drift lower. But they forged ahead with a decision to end the central bank’s bond-buying program because the domestic economy and labor market appeared to be on course for further improvement.
Participants at the Oct. 28-29 meeting “pointed to a somewhat weaker economic outlook and increased downside risks in Europe, China, and Japan, as well as to the strengthening of the dollar over the period,” said minutes of the session, which were released Wednesday with the regular three-week lag.
“It was observed that if foreign economic or financial conditions deteriorated further, U.S. economic growth over the medium term might be slower than currently expected,” the minutes said. “However, many participants saw the effects of recent developments on the domestic economy as likely to be quite limited.”
All but one official at the meeting wanted to end the bond-purchase program, known as quantitative easing, that was launched in late 2012 to spur economic growth.
The Fed, led by Chairwoman Janet Yellen , has been navigating a conflicting economic backdrop of late. The job market has continued to improve faster than officials expected, but a strong dollar and weak growth abroad are combining to put downward pressure on inflation. This complicates looming Fed debates about when to start raising short-term interest rates from near zero. The improving job market calls for a move toward rate increases next year, while downward pressure on inflation calls for the Fed to hold off.
Downward pressure on inflation is a more recent development.
“Most participants anticipated that inflation was likely to edge lower in the near term, reflecting the decline in oil and other commodity prices and lower import prices. These participants continued to expect inflation to move back to the Committee’s 2 percent target over the medium term,” the minutes said.
However, officials approached the inflation question with heightened uncertainty. “Many participants observed that the Committee should remain attentive to evidence of a possible downward shift in longer-term inflation expectations; some of them noted that if such an outcome occurred, it would be even more worrisome if growth faltered.”
Against that backdrop, officials appeared to emerge from the meeting with little clear direction on how to reshape the guidance they give the public on the outlook for interest rates. The Fed has been saying since last year that rates would stay near zero for a “considerable time” after the bond program ended.
With the program now completed, many Fed officials are looking to drop the “considerable time” assurance. But the minutes left little clear indication of when and how this guidance might be changed.
Some officials wanted to drop the term at the October meeting. They didn’t want to appear locked into a specific time frame for their plans. “Considerable time” is generally interpreted in financial markets to mean at least six months, though the Fed has sought to play down that notion. Other officials thought this phrase still best described their plans, while others didn’t want to inadvertently send a signal of impending rate increase by removing the phrase.
To this discussion officials added a new twist: A debate about whether they should add new information in their official policy statement on how quickly rates will rise once increases commence.
“With regard to the pace of interest rate increases after the start of policy normalization, a number of participants thought that it could soon be helpful to clarify the Committee’s likely approach,” the minutes said. On this point, too, there was no agreement. This appears to set the Fed up for an intense debate at its December 16-17 on refining these interest rate signals.
Signs of angst about market volatility also emerged at the October policy meeting. The meeting took place a week after sharp swings in prices for U.S. stocks and bonds, in particular a surge in demand for U.S. Treasury securities on Oct. 15 which temporarily drove yields on 10-year Treasury notes below 2%.
“Some participants pointed out that, despite the market volatility, financial conditions remained highly accommodative and that further pockets of turbulence were likely to arise as the start of policy normalization approached,” the minutes said. “That said, more work to better understand the recent market dynamics was seen as desirable.